"New HUD Policy Could Give Short-Sale Investors a Huge New Advantage!"
by Cory Barnett
Everyone knows that the government doesn't like to lose money, and now the Federal Housing Association (FHA) has upped the ante for lenders that do not engage in loss mitigation efforts. The U.S. Housing and Urban Development (HUD) Department recently announced a program to reward lenders for trying harder to recoup their losses before declaring a loan in default.
Previously, HUD was able to assess fines up to $1.25 million per year against a lender that did not utilize mitigation programs. Now, these fines are uncapped, and the lenders can be assessed additional damages up to TRIPLE THE AMOUNT of any FHA mortgage insurance benefit claimed by the lender!
However, this dramatic step is coupled with a dramatic reward: lenders can claim additional benefits if they can show they’ve followed all suggested procedures.
Either way, this is great news for short-sale investors, because it makes it very worthwhile for a bank or lender to listen to your offer. The FHA's loss mitigation program lists pre-foreclosure sales as one of five options that lenders have the authority and responsibility to investigate when working with homeowners in financial difficulties with their mortgage.
This new policy came into effect in Summer of 2006.
Thanks for the post. I am a little curious though. Can you provide information as to what a short sale is? It's funny that I found this post. I was just asking someone if they can explain what a Short Sale was to me, and instead of helping me, they wound up confusing me more. Any information you can give me, would be greatly appreciated. Thank you.
Your post is a little late. These rules went into effect in 2004 I believe. Before that the maximum fine was 6500.00 per occurance and 1.25 mil total fine per year on a lender. Here is the posting from HUD.
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HUD No. 04-037
Lemar Wooley
(202) 708-0685
www.hud.gov/news
For Release
Wednesday
April 14, 2004
HUD RAISES FINES FOR LENDERS WHO FAIL TO ASSIST TROUBLED BORROWERS
WASHINGTON - The Department of Housing and Urban Development today published a proposed rule that would triple the amount of damages HUD can seek against a FHA lender that fails to engage in loss mitigation techniques. Loss mitigation options can enable many homeowners who are in default on their FHA mortgage to remain in their home.
"We are working to ensure that every qualifying FHA borrower is afforded the opportunity to explore all options to keep their homes," said HUD Secretary Alphonso Jackson. "Our lenders must engage in loss mitigation efforts to help people stay in their homes, help to stabilize neighborhoods and prevent losses to FHA's Insurance Fund."
In recent years, HUD has strived to ensure that lenders work with FHA-insured homeowners in default to see how they may qualify for one of HUD's loss mitigation options. In the last two fiscal years, approximately half of defaulted FHA borrowers have been able to avoid foreclosure. The proposed rule would build upon those efforts by specifically addressing how HUD will be empowered to penalize lenders who fail to successfully engage in loss mitigation techniques and by specifically defining the criteria used to evaluate a lender's performance.
Currently, the maximum penalty that can be imposed on lenders is $6,500 for each violation, up to a limit of $1.25 million for all violations committed during any one-year period. This new triple damages penalty would be in addition to the current penalty and not subject to the current limitations.
Failure to engage in loss mitigation is defined as a servicing lender's failure to: evaluate a loan for loss mitigation before four full monthly mortgage installments are due and unpaid; determine which, if any, loss mitigation techniques are appropriate and take appropriate loss mitigation actions. HUD will use its Tier Ranking System (TRS) to measure a lender's loss mitigation efforts on a portfolio-wide basis, and rank the lender based on the ratio of loss mitigation actions to foreclosure actions. HUD intends to focus its efforts on lenders ranked in the lowest tier.
Loss mitigation techniques include the following:
Special Forbearance, in which the lender arranges a repayment plan based on the borrower's financial situation and possibly provide for a temporary reduction or suspension of payments;
Mortgage Modification, in which the lender reduces the monthly payment and/or extends the term of the mortgage;
Partial Claim, in which the lender obtains a one-time payment from the FHA insurance fund to bring the mortgage current;
Pre-Foreclosure Sale, in which the borrower avoids foreclosure by selling the property for less than the amount necessary to pay off the mortgage, and
Deed-in-Lieu of Foreclosure, in which the borrower gives back the property to the lender. The borrowers lose their house, but do not damage their credit rating as much as a foreclosure would.
For each of these options, the borrower must meet certain qualifications, based on their circumstances. HUD's site, "Help for Homeowner's Facing the Loss of Their Home," provides a step by step plan and offers more details on HUD's loss mitigation programs.
HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.
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